How Wal-Mart stole Christmas

Analysts say that Wal-Mart is likely to outshine Target in November and December sales results.

NEW YORK (CNNMoney.com) -- For nearly a decade, Wal-Mart Stores Inc. has been outperformed by Target Corp. when it mattered the most - at holiday shopping time.

Maybe not this year.

Although the final sales results aren't in yet, analysts are confident that Wal-Mart has finally trumped its closest competitor in the 2007 holiday sales race.

"There's no doubt that Wal-Mart is back," said Craig Johnson, president of retail consultancy Customer Growth Partners.

Johnson, who has tracked the rivalry between the two discounters since the late 1990s, said Target has consistently drubbed Wal-Mart (WMT, Fortune 500) on same-store sales growth in November and December - a period that can account for nearly half of a retailer's sales and profits - by enticing shoppers with glitzier ads, better-quality products and more name-brands.

This year, Johnson expects Wal-Mart to come out on top.

On Monday, Target (TGT, Fortune 500) warned that its December same-store sales, which track stores open at least a year, could fall well below its earlier guidance of 3 to 5 percent increase. Its November sales, adjusted for a calendar shift, rose only 1.1 percent.

Investors and analysts closely track same-store sales as a reliable gauge of retail performance than total sales increases.

It's not just shoppers turning away from Target. Wall Street has soured on the retailer, pushing its stock down more than 10 percent to a closing price on Thursday of $50.64 a share. By comparison, Wal-Mart's shares have gained 5 percent this year to a most-recent close of $47.77.

Target's dour holiday forecast caused Goldman Sachs analyst Adrianne Shapira on Wednesday to lower her 2007 and 2008 profit estimates for Target.

"Price is key. Wal-Mart got more aggressive on key toy and electronics as [the] holiday [season] progressed," Shapira wrote in a note.

Wal-Mart's November sales rose 1.5 percent. It hasn't commented about December sales but the retailer's earlier forecast called for same-store sales to grow between 1 and 3 percent for the month.

Analysts polled by Thomson Financial expect Wal-Mart to post a 2 percent same-store sales increase in December, and Target to suffer a 1.2 percent decline for the month.

Retailers will report December same-store sales results on Jan. 10. Wal-Mart did not immediately comment for this article.

A Target spokeswoman declined to comment, citing its upcoming sales report.

So what has turned the tide for Wal-Mart?

Johnson traced it back to strategy changes that the retailer made in January.

Wal-Mart hired a new advertising firm, Martin Agency, ranked by Advertising Age as one of the top five agencies of the year in 2006. In the same month, the company named Stephen Quinn as chief marketing officer.

Said Johnson, "Quinn used to be CMO at Frito-Lay. Industry insiders say he has a very strong marketing mind."

Wal-Mart strengthened its branded electronics offerings by introducing Dell computers to its stores in June. In September, Wal-Mart discarded its staid "Always Low Prices" slogan for a new tagline - "Save Money. Live Better" - in time for the holidays.

"If you make a promise like that, you have to deliver it in your store," Johnson said.

Industry experts said Wal-Mart backed up that theme by being the first to aggressively slash prices on thousands of toys in late October followed by a round of early discounts in November on some of the year's hottest electronics.

Target chose not indulge in an early price war with Wal-Mart.

Analysts said Wal-Mart appears to have outperformed Target on grocery purchases as well, which account for a big chunk of both retailers sales.

"There's a real sense of urgency at Wal-Mart. The stores had that festive feel and look in early November," Johnson said. "In some Target stores I visited, the level of service varied from indifference to non-existent."

Meanwhile, Target's problems extend beyond its sagging same-store sales.

Earlier this month, Target disappointed investors after announcing that it would take longer than expected to decide whether or not it will sell its $7 billion credit-card business. Analysts expected the company to announce a decision by year-end.

Activist investor William Ackman is also putting pressure on Target's management. Ackman disclosed in July that his fund, Pershing Square Capital Management, owned a 9.6 percent stake in Target.

"[Target's] common stock is undervalued and [we] intend to discuss with management ways in which this undervaluation can be corrected," the firm said in the filing.

Last week, Ackman tightened the screws by announcing the fund had raised its stake in Target to about 12 percent and had held discussions with Target's management.

Carol Levenson, analyst with independent corporate bond research firm Gimme Credit, downgraded her credit score on Target to "deteriorating" from "stable" this week.

She said in a research note that "the new, more aggressive rhetoric from Ackman, coupled with an increased economic stake along with an even more depressed stock price amid murky sales and earnings visibility have forced us to downgrade our credit score further."

Despite its challenges, analysts still expect Target to log healthy total sales growth of 6 percent this year. And Wal-Mart hasn't shed all its problems either, particularly slowing same-store sales growth in the U.S. and setbacks in some of its international markets.

"Target is still a great retailer, but they've taken their eye of the ball and I'm having a hard time figuring out why," said Johnson.

He said it could be that Target is catering too much to Wall Street's demands to boost the stock and profits instead of improving the in-store experience.

While checkout lines at holiday time are always long, Wal-Mart did a better job than Target did in providing assistance to shoppers searching for products, said Stevan Buxbaum, retailing expert and executive vice president of consulting firm Buxbaum Group.

"This holiday season Wal-Mart really outmaneuvered Target in service," Buxbaum said.

"As a merchandiser, you can't ignore the customer experience. The level of helpfulness in Target stores is approaching Home Depot territory," Johnson said.

Given Home Depot track record with poor customer service, any comparison to the home improvement retailer in that regard is a warning and not a compliment.